SLUSA precludes another state class action over broker kickbacks

For the second time in as many weeks, a circuit court of appeals has dismissed state-law claims against a brokerage for violating the duty of best execution. On the heels of a Ninth Circuit decision involving Charles Schwab, the Eighth Circuit held that the Securities Litigation Uniform Standards Act (SLUSA) precluded claims against Scottrade. It was "obvious" to the court that Scottrade’s alleged misconduct in routing orders to venues that paid rebates was "in connection with" the purchase and sale of covered securities (Lewis v. Scottrade, Inc., January 9, 2018, Loken, J.).

The putative class action alleged violations of the Missouri Merchandising Practices Act, common-law breach of fiduciary duty, and unjust enrichment. According to the complaint, Scottrade violated the duty of best execution by routing customer limit orders to trading venues that pay rebates to the sending broker. Although brokers are not required to made trade-by-trade determinations as to the best trading venue for clients, the duty of best execution requires them to do so in the aggregate, considering the likelihood and speed of trade execution and opportunities for price improvement. Allegedly, in 2013 and 2014 the firm directed nearly all customer non-directed standing limit orders to the trading venues offering the largest rebates. But the district court in St. Louis dismissed the complaint, concluding that SLUSA barred the claims.

SLUSA precludes "covered class actions" based in state law alleging either a misrepresentation or omission, or a manipulative or deceptive device or contrivance, in connection with the purchase or sale of a covered security. In this case, it was undisputed that Lewis filed a "covered class action" and that Scottrade deals in "covered securities" within the meaning of the statute. The issues on appeal were whether the complaint alleged a misrepresentation, omission, or manipulative or deceptive device or contrivance that was "in connection with" the purchase or sale of a covered security.

"In connection with." The plaintiff argued that SLUSA does not apply to misconduct that induces a customer to choose one brokerage over another. But the alleged failure to provide best execution was material in every trade that the plaintiff had Scottrade execute, and it produced revenue for Scottrade each time. It was "frivolous" given Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit (U.S. 2006) to argue that the breach of the duty of best execution was not in connection with the purchase or sale. Dabit established that SLUSA has preclusive effect when the alleged fraud "coincides" with a securities transaction.

Misrepresentations or omissions. Furthermore, although the plaintiff did not specifically allege fraud or material misrepresentations or omissions, the core of the complaint was that Scottrade did not disclose that it was not seeking best execution. The plaintiff alleged that the practice of sending orders to the venues that paid rebates systematically derogated clients’ interests and enhanced Scottrade’s own profits in a way that was "immoral, unethical, oppressive, and unscrupulous." Even if the plaintiff did not allege a misrepresentation or omission, the complaint, fairly read, alleged the use of a manipulative or deceptive device or contrivance. Accordingly, SLUSA precluded the claims.

Interested in submitting an article?

Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on securities regulation legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.

Create a PasswordPlease enter a PasswordYour password must be at least 6 characters longNo validation was done for leading or trailing spaces in password.

Yes, I would like to create an account.

I consent to the collection of my personal information by Wolters Kluwer Legal & Regulatory U.S., operated through CCH Incorporated and its affiliate Kluwer Law International, so that I can create an account to store my contact information and order history to facilitate ecommerce transactions. I understand that my personal information will be processed for this purpose in the United States where CCH Incorporated operates.

You may change or withdraw your consent at any time by contacting our Customer Service team at +1-301-698-7100 or [email protected]. For more information about our privacy practices, please refer to our privacy statement: www.WoltersKluwerLR.com/privacy.

Online subscription product purchases require that you create an account.

Email Address
This field is required
Please Type Valid Email Address
Email Address has a minimum length of 0.
Company
This field is required
Country
This field is required

Yes, send me information on similar products and content from Wolters Kluwer.

I consent to the collection of my personal information by Wolters Kluwer Legal & Regulatory U.S., operated through CCH Incorporated and its affiliate Kluwer Law International, so that I can be contacted about similar product(s) and content. I understand that my personal information will be processed for this purpose in the United States where CCH Incorporated operates. Additionally, if the products being inquired about are fulfilled by Kluwer Law International, my personal information will be shared with Kluwer Law International and processed in the Netherlands or the United Kingdom where it operates.

You may change or withdraw your consent at any time by contacting our Customer Service team at +1-301-698-7100 or [email protected]. For more information about our privacy practices, please refer to our privacy statement: www.WoltersKluwerLR.com/privacy.

Thank you!

We apologize!

Interested in submitting an article?

First Name
This field is required

Last Name
This field is required

Email Address
This field is required
Please Type Valid Email Address
Area of Expertise
This field is required
Article Idea for Consideration
This field is required

Yes, send me information on similar products and content from Wolters Kluwer.

I consent to the collection of my personal information by Wolters Kluwer Legal & Regulatory U.S., operated through CCH Incorporated and its affiliate Kluwer Law International, so that I can be contacted about similar product(s) and content. I understand that my personal information will be processed for this purpose in the United States where CCH Incorporated operates. Additionally, if the products being inquired about are fulfilled by Kluwer Law International, my personal information will be shared with Kluwer Law International and processed in the Netherlands or the United Kingdom where it operates.

You may change or withdraw your consent at any time by contacting our Customer Service team at +1-301-698-7100 or [email protected]. For more information about our privacy practices, please refer to our privacy statement: www.WoltersKluwerLR.com/privacy.

Success

We appologize

Request Free Trial

Thank you for your interest in a free trial! We look forward to connecting with you.

First Name
This field is required

Last Name
This field is required

Email Address
This field is required
Please Type Valid Email Address
Phone Number
This field is required
Title (Optional)Company Name
This field is required
Organization Type
This field is required
Country
This field is required
State or Province
This field is required

Yes, send me information on similar products and content from Wolters Kluwer.

I consent to the collection of my personal information by Wolters Kluwer Legal & Regulatory U.S., operated through CCH Incorporated and its affiliate Kluwer Law International, so that I can be contacted about similar product(s) and content. I understand that my personal information will be processed for this purpose in the United States where CCH Incorporated operates. Additionally, if the products being inquired about are fulfilled by Kluwer Law International, my personal information will be shared with Kluwer Law International and processed in the Netherlands or the United Kingdom where it operates.

You may change or withdraw your consent at any time by contacting our Customer Service team at +1-301-698-7100 or [email protected]. For more information about our privacy practices, please refer to our privacy statement: www.WoltersKluwerLR.com/privacy.

Thank you!

We aplogize!

Message Us

Thank you for your inquiry! We look forward to connecting with you.

First Name
This field is required

Last Name
This field is required

Email Address
This field is required
Please Type Valid Email Address
Phone Number
This field is required
Company Name
This field is required
Country
This field is required
Topic (Optional)Account or Invoice Number (Optional)Comments (Optional)

Thank you. We will contact you soon!

We apologize, but we failed to receive this message.

Thank You!

Thank You.

Your request has been forwarded to a Wolters Kluwer representative who will contact you shortly!